Court Dismisses Complaint Because Claims Already Released And Settlement Money Paid

Now this requires chutzpah.

A New York appellate court recently struck down plaintiffs’ attempt to sue their former employer for employment discrimination – three years after they received money pursuant to a settlement agreement.  The case is Allen v. The Riese Organization, decided May 16, 2013.

Under New York law, there is no independent obligation (i.e., absent a contractual obligation) to provide severance benefits to a departing employee.  Therefore, since the employer does not have to provide these benefits, they will often agree to pay something to a departing employee in exchange for the employee’s promise not to sue.  This exchange – money for a promise – is what creates a binding contractual obligation.

The stronger a departing employee’s potential claims, the more leverage they have in severance negotiations (or, viewed differently, the more an employer is willing to pay to “buy” a promise not to sue).

In Allen, plaintiffs accepted severance payments of two weeks’ pay in exchange for releasing their claims against the defendants.  Three years later, they sued under the New York State and City Human Rights Laws, alleging race discrimination, hostile work environment, and retaliation.

The court began by highlighting the comprehensive nature of the agreement:

Upon their discharge, plaintiffs each signed a Severance Agreement and Release that “release[d] and forever discharge[d] [A.R.O., its corporate affiliates, officers and employees] . . . from all claims[,] causes of action, grievances, and liabilities of any nature whatsoever that [plaintiffs] may now have or could have, . . . including without limitation any claims or liabilities arising pursuant to any employment relations statute, including all claims arising under . . . the New York State Human Rights Law[] [and] the New York City Administrative [C]ode.”

The top of each page of the release bears the notation “BEFORE SIGNING THIS AGREEMENT, YOU SHOULD CONSULT AN ATTORNEY.” The release explicitly states that it is executed voluntarily by plaintiffs with a full understanding of its terms, and after having the opportunity to obtain the advice of counsel. The release further notes that the parties intended it to be a “general release” effective to the fullest extent allowable by law.

The release states that plaintiffs had sufficient time to consider the terms, and each plaintiff acknowledged: “I HAVE READ AND UNDERSTAND THIS [RELEASE], THIS [RELEASE] IS WRITTEN IN TERMS THAT I UNDERSTAND, AND I AM AWARE THAT I MAY BE GIVING UP IMPORTANT RIGHTS.” The release includes a “cooling off” clause which provides that plaintiffs could revoke the release during the seven-day period after signing it. In the release, plaintiffs state that they understand their right of revocation, and that if they choose not to exercise it during the seven-day period, the release would become effective and enforceable. It is undisputed that plaintiffs never exercised their revocation rights.

As consideration for the release, plaintiffs agreed to accept a severance payment in an amount equivalent to two weeks pay. In the release, plaintiffs acknowledge that they were not entitled to the severance payment other than by reason of the release, and that the payment constituted adequate consideration.

After signing this document, plaintiffs received the full severance payments promised.

In response to defendants’ motion to dismiss, plaintiffs argued that the releases were unenforceable because they were “procured by duress and fraud.”  Although the lower court found issues of fact regarding validity of the releases, the appellate court held that the complaint should have been dismissed in its entirety.

The court summarized the law as follows:

Generally, a valid release constitutes a complete bar to an action on a claim which is the subject of the release”. … A release will not be treated lightly because it is a “a jural act of high significance without which the settlement of disputes would be rendered all but impossible”. … Where the language is clear and unambiguous, the release is binding on the parties unless it is shown that it was procured by fraud, duress, overreaching, illegality or mutual mistake.

Plaintiffs failed to overcome this significant hurdle:

Here, there is no question that plaintiffs executed general releases that clearly and unambiguously waived all claims against defendants, and specifically claims arising under the state and city human rights laws. On appeal, plaintiffs do not dispute that the releases cover their discrimination, retaliation and hostile work environment claims, but instead contend that the releases are not enforceable because they were the product of duress and overreaching. Specifically, plaintiffs claim that their supervisor threatened that if they did not sign the releases, he would withhold their last paycheck and block their unemployment benefits.  Assuming arguendo that issues of fact exist as to duress and overreaching, plaintiffs are nevertheless barred from challenging the releases on those grounds because they ratified the releases. Ratification occurs when a party accepts the benefits of a contract and fails to act promptly to repudiate it. … Thus, a plaintiff cannot claim that he or she was compelled to execute an agreement under duress while simultaneously accepting the benefits of the agreement. …

Here, plaintiffs’ acceptance of benefits under the releases and their inordinate delay in challenging them bar any claims of alleged duress and overreaching. Plaintiffs raise no challenge to defendants’ documentary evidence showing that they received payments under the releases, namely, the severance checks they were not otherwise entitled to. … Nor do plaintiffs dispute that more than three years passed between the alleged duress and the time they sought to repudiate the releases. Such a prolonged period cannot under any circumstances be considered prompt. …

Plaintiffs’ claims of duress and overreaching are further undermined by the “cooling off” provision contained in the releases. On two separate pages, plaintiffs explicitly acknowledged that they could revoke the releases at any time during the seven-day period following execution. They further acknowledged that if they did not exercise their revocation rights, the releases would be fully effective and enforceable. Plaintiffs, however, never sought to rescind the releases, reaped the benefits of the severance payments, and only challenged the releases after three years. Under these circumstances, plaintiffs are barred from asserting their duress and overreaching claims.

The take-away?  You can’t eat your cake and have it too.